"These changes have already begun to exert a powerful impact on the Chinese economy, and pose a serious risk to future economic growth, social harmony and political stability."

The World Bank Report, China 2030, describes China's economic performance over the last 30 years as a "unique development success story, providing valuable lessons for other countries".

It praises China for "…integrating with the world; adjusting to new technologies; building world-class infrastructure; and investing heavily in its people."

The World Bank report however, calls for a burst of economic reform in China to strengthen the foundations for a market based economy through privatisation of state-owned enterprises and implementation of a system of legal and corporate governance.

It also calls on China's policy makers to:

Accelerate the pace of innovation through research and development

Encourage green development and more efficient use of resources

Expand opportunities through equal access to jobs, finance, services and social security

Intensify trade and investment links with the global economy by injecting new life into the Doha multilateral trade negotiations

Integrate the Chinese financial sector into the global financial system.

If it can achieve these reforms, China will transform from a middle-income country to high-income status.

Other major economies, like India, will gain a demographic dividend in the next few years, but they face a different challenge.

India's need to raise productivity and create new jobs is dramatic.

Every year, it struggles to find employment for a new cohort of job starters nearly as large as Australia's entire labour force.

Observers have referred to the middle-income trap.

By this they mean, a country reaches a moderate, middle income level and gets stuck – held back by factors like low investment, slow growth in manufacturing, a lack of diversity in the economy or poor labour market conditions.

A country growing at a rate too low to graduate to high income status creates the possibility that per capita incomes could stall between US$5,000 and US$10,000 for years or even decades.

The Asian Development Bank predicts China should avoid this trap, but finds other Asian countries stuck there or at risk.

When I was in Hanoi in March, I discussed this issue with an eminent group of thinkers.

They were very focused on what Vietnam needed to do to avoid that fate.

Some countries will be blocked from reaching full potential by infrastructure problems.

Elsewhere, wages growth is accelerating faster than productivity.

Others may be held back by shortcomings in governance.

It is a challenge for developing countries to make the transition to high income status.

Only a few large economies outside Europe have made the transition since the end of World War II, many of them in East Asia – Hong Kong, Japan, South Korea, Singapore and Taiwan.

But it is possible countries can be trapped in the middle, unable to build the robust governance and legal systems needed to propel higher economic growth.

When weighing risks to Asia's continued growth trajectory, we must consider the possibility of geo-political instability.

Competing nationalism and territorial disputes are not uncommon: the Taiwan Strait; the Korean peninsula; and, the South China Sea.

Certainly, there have been times when we had cause to worry: the Korean war, the Malayan emergency, and war in Vietnam.

But since the late 50s, for many, and from the 1980s for others, countries of the region have been able to set aside security concerns and focus on economic development.

In many cases it has meant they've postponed strategic ambitions.

Imagine what kind of region we would have now if Zhou Enlai and then Deng Xiaoping, had not shifted China's focus from reunification with Taiwan to the goal of economic growth.

Japan's confidence and capacity to pursue post-war reconstruction was not inevitable or pre-ordained.

Stability was tenuous in early post-war Japan – and for other countries in the region.

Korea and Singapore pulled themselves out of poverty by fast-tracking economic growth.

They and other countries in the region have benefitted from free trade and adherence to a rules-based international order.

For countries following this trajectory, like Vietnam, the Philippines and now at last, Myanmar, the demonstration effect was overwhelming.

An important factor behind this confidence has been the commitment and presence of the United States in the Asia Pacific.

Not only its military presence but also its aid, business investment and its willingness to transfer technology.

China and the United States

On our relationship with China and with the US, we've got to be resistant to a notion that there's a binary choice.

First, both the Chinse and the Americans tell us that their own relationship is very good – something that was confirmed by the recent economic and strategic dialogue between Americans and Chinese in China when the distraction of the Chen dissident affair failed to dislodge the talks.

And this is in contrast with the relationship between America and the Soviet Union during the Cold War.

The prosperity of China and America would be undermined by a period of military conflict or frozen relations.

The third observation I'd make is this, the Australia-China relationship will continue to be robust because it's in the interests of both of us to enjoy a strong partnership.

South China Sea

We need to keep up our creative, diplomatic efforts to help build trust and understanding in our region.

We support an international rules-based order.

Australia is already one of the most Asian oriented economies.

Asia has been at the centre of our diplomacy for six decades.

And we have been at the forefront of creating and supporting regional institutions from APEC to the ASEAN Regional Forum.

More recently we've been involved in the expansion of the East Asia Summit.

Australia has long recognised that the geo-politics of Asia are fundamental to our security and prosperity.

Australia needs to ensure that both the opportunities and challenges of an Asian century continue to work to our advantage.

The South China Sea is a source of disputed territorial claims.

Australia does not take sides on the territorial disputes, but we call on countries to pursue their territorial claims and accompanying maritime rights in accordance with international law, including the United Nations Convention on the Law of the Sea.

Maintaining and strengthening peace and stability, based on the rule of law, remains our goal in the South China Sea.

This is not easy in a place where development potential intersects with deep and long-held convictions about who owns what.

But the South China Sea isn't the only place where there have been complex and overlapping territorial and maritime claims.

To advance, it can often be better for parties to 'agree to disagree' about who owns what and to focus on how all parties can benefit.

I want to mention two relevant models that can be adopted for countries to successfully manage competing interests.

The first is the Antarctic Treaty system.

The Treaty came into force in June 1961 after ratification by 12 countries then active in Antarctic science.

Its objectives are:

to demilitarise Antarctica, establish it as a zone free of nuclear tests and the disposal of radioactive waste, and to ensure that it is used for peaceful purposes only

to promote international scientific cooperation in Antarctica and,

to set aside disputes over territorial sovereignty.

Under the Treaty, countries have for more than 50 years put aside their differences over sovereignty and cooperated to promote peace and science.

Members of the Antarctic treaty system have worked together to conserve and manage Antarctica's living marine resources, including through sustainable fisheries and by combating illegal fishing.

The Treaty works.

Australia, an initial signatory, played a key role in the negotiation and development of the treaty system.

And we hosted the 35th Antarctic Treaty Consultative Meeting in Hobart in June.

The second relevant model is that of joint development zones.

Joint development zones are designed to facilitate equitable and mutually beneficial development – a concept that is expressly provided for in the UN Convention on the Law of the Sea.

The zones are operating successfully around the world, including in South East Asia, Africa, northern Europe and the Caribbean.

In our region, Cambodia, Malaysia, Thailand and Vietnam were early participants in joint development zones.

Thailand and Malaysia entered into a Memorandum of Understanding (MoU) on joint development of seabed resources in the Gulf of Thailand in February 1979.

Cambodia and Vietnam concluded an agreement in July 1982 over disputed waters – which placed a maritime area under a "joint utilisation regime."

Before Thailand and Vietnam concluded an agreement on maritime boundaries in August 1997, they discussed the potential joint development of an overlapping area.

In June 1992, Vietnam and Malaysia applied the same principles in their Memorandum of Understanding – set in place to jointly exploit a "Defined Area" in the Gulf of Thailand.

In 1999, Vietnam, Thailand and Malaysia also agreed on joint development of an 800 square kilometre zone.

With our neighbours, East Timor, we are jointly developing Timor Sea petroleum resources for the mutual benefit of both countries – based on groundwork laid with Indonesia.

I'm not saying that joint development zones or an Antarctic Treaty-style system will provide all the answers in the South China Sea.

But thinking creatively and constructively and examining models like these provide a path that deserves to be explored.